What Is a Cap Table? A Guide for Startup Founders

Startup founders, it seems safe to say, have a bias toward building things. But it’s the rare founder who thrills at the challenge of building that one thing a growing startup needs most: a capitalization table. This is understandable. Even in a company’s earliest stages, it can be overwhelming to step back and take account of which shareholder owns what. 

But a capitalization table—or cap table, for short—is not a thing to be feared. Sure, it sounds like a lot of work to put down in writing a comprehensive account of your company’s equity ownership, but all that work can lead to some pretty great outcomes. A strong cap table helps your CFO and other executives make agile decisions, keeps your employees happy and motivated, and gives potential investors the information they need to bet on your business. 

In this article, we’ll review everything a startup founder needs to know about cap tables—from what they are and how they work, to how to manage a cap table as your company grows from seedling to pre-IPO unicorn.

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What is a cap table?

A cap table is a table that tracks the equity ownership of your company’s stakeholders. These shareholders will likely include yourself (the founder), other founders or members of your executive team, your employees, and any outside investors who have an ownership stake in your company.

Just as a cap table lists out all of the shareholders and other equity holders, it also lists out all the different types of equity those shareholders hold. For example: As a founder you may hold a certain number of shares of common stock or preferred stock, and those shares would be listed under your name in a cap table. Your employees may hold a number of stock options, and those would be listed under each of their names. And so on and so forth.

The point of a cap table, to be clear, is to provide a clear breakdown of how the ownership of your company is dispersed among its various stakeholders. This accuracy of this breakdown is important, not only for your current investors and shareholders, but for any prospective investors who need to understand how equity is diluted and dispersed at your company. 

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How to read a cap table

The earliest version of a private company’s cap table is likely just a spreadsheet. There’s no one-size-fits-all way to build a spreadsheet cap table, but it typically incorporates a few essential pieces of information: 

• The name of each shareholder, exactly as it appears on the stock certificate or other security instrument.
• The type of equity owned by each shareholder, i.e. common shares, Series A preferred stock, employee stock options, warrants, etc.  
• The amount of equity owned by each shareholder, typically in number of shares or units
• The date the equity was granted or issued
• The total number of fully diluted shares for each shareholder, i.e. the total number of shares that have actually been issued plus any shares that remain in the option pool and thus may one day belong to that shareholder. Note that the fully diluted number is denominated in common shares. Preferred shares are sometimes converted into common shares based on a conversion ratio (for example: one preferred share = three common shares). This makes it easy to compare equity between stakeholders who may hold different equity types.
  

These elements are ideally organized in a way that’s easy to read. Keep in mind that a strong and well-maintained cap table will probably have quite a bit more information and commentary in it as well, but these are really the bare essentials in terms of the information you need to get across.

If you want to see what a basic cap table looks like in action, check out this cap table example for the company Acme Incorporated.

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Common equity types found in cap tables

If you’ve gone through a number of funding rounds, you probably already know that equity can get confusing pretty quickly. There are a lot of types of equity! Here’s a quick breakdown of some of the more common types you might see represented in a typical cap table:

• Common stock: As its name implies, this is probably the simplest form of equity to wrap your head around. Owning a share of common stock means you own a share of the company itself. The ownership percentage each share represents (and what rights the owner is entitled to) depends on a number of factors, such as the total number of shares and the company’s corporate charter.  
• Preferred stock: This is a different type of stock that comes with different rights and privileges than common stock. Preferred stock usually doesn’t come with the same voting rights as common stock, but a preferred stockholder is typically the first to be paid out in terms of dividends or in the case of a liquidity event. Sometimes preferred stock is classified as “convertible,” which means it can be converted to common stock if specific circumstances are met.
• Employee stock options: Stock option grants are a type of compensation that allows (but doesn’t obligate) the employee to purchase a number of shares of common stock at a fixed exercise price. Stock option plans are historically the most prevalent form of equity-based compensation for employees.
• Restricted stock units (RSUs): RSUs are another type of employee compensation that converts into common stock when, for example, time restrictions and a liquidity event condition are met. In a separate guide, we’ve broken down the key differences between stock options and RSUs.
• Restricted stock awards (RSAs): RSAs are awards of company stock. Like RSUs, RSAs typically come with a vesting period, during which time the recipient’s rights to the stock are restricted. Unlike RSUs, RSA shares legally belong to the holder, so vesting is typically more about a company’s rights to repurchase shares in the event of the holder leaving or being fired.
• Warrants: Kind of like a stock option, a warrant grants the owner the right (but not the obligation) to purchase a number of shares of stock at a future date at a fixed exercise price. It’s pretty uncommon for employees to be granted warrants, though investors can trade or buy them over-the-counter.

Other types and permutations of equity exist, and the above list is by no means exhaustive. But it’s a good starting place for understanding the various equity elements represented in a typical cap table.

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Other key terms: pre-money valuation vs. post-money valuation 

Besides knowing the types of securities you’ll come across in a cap table, you should familiarize yourself with how valuation is defined in a cap table. The short answer is that valuation is typically represented in two general ways: pre-money valuation and post-money valuation.

A company’s “valuation” isn’t simply one magical, irrefutable number; it can be different depending on when and how it is valued. 

The pre-money valuation is the valuation that’s calculated before outside equity investments are factored in. It’s meant to help investors understand how much your company is currently worth—and, indeed, sometimes investors will propose their own pre-money valuation for your company as a basis for fundraising talks.

The post-money valuation is how much a company is valued after additional investments are accounted for. This figure is important to investors because it helps them understand how much equity they own after they invest their money in your company. You can find it with a straightforward calculation: pre-money valuation + investments = post-money valuation.  

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How is a cap table different from a balance sheet?

A cap table is not the same thing as a balance sheet, but you can be forgiven for confusing the two. 

Long story short, a balance sheet is an accounting of the balance of your company’s assets and liabilities, while a cap table focuses more on who owns what part of the company. The balance sheet focuses on the business side of things, while the cap table focuses on the equity ownership side of things.

Again, the two are related and perhaps equally essential in understanding your company’s financial outlook, but they are not the same thing.

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Why do I need a cap table?

Like any good founder/entrepreneur, you need a cap table because you need to be as intelligent as possible about the business you’re running. A cap table is a way of taking something that can seem pretty complicated and opaque—i.e. all the intricate ways in which the ownership of your company breaks down—and turning it into a clear, legible tool for making business decisions.

Are you planning on hiring the best talent out there? Then you need to know many stock options you can offer to hire and retain that talent. 

Are you shopping around for new investors? Then you’ll need a cap table that’s in a good state so any potential investors can quickly do their due diligence and close on a deal. 

A broken or out-of-date cap table can lead to confusion over equity packages and unhelpful disparities in employee compensation. Take the time to get it right at the outset, and you’ll thank yourself for the lack of a headache later. 

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Who creates a cap table?

Who you entrust to create and manage your cap table may depend on the stage of your company. In any case, it may not be the best idea to pop open a Google Sheet and go to town on it yourself. Cap tables have a tendency to get super-complicated super-quickly, and that’s before you even get into all the legal documents.

So, first things first: Involve your lawyer and/or accountant in the process. But even if your company is tiny and you don’t have a ton of resources at your disposal, you have some great options to help you out. 

Like Pulley, for example. Our flexible data models make it easy to manage cap tables, regardless of your company’s size. Even our Startup plan for  budget-conscious and scrappy startups comes with all the tools and integrations you need for effective cap table management.

Check out all of our plans on our cap table management page.

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How to create a strong cap table: 3 tips for startup founders

To wrap up, let’s consolidate some of our favorite tips for startup founders embarking on their first cap table adventure:

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1. Don’t try to do it all yourself

You have a lot on your plate, and a cap table is definitely not the place to cut corners. If you’re anticipating rapid growth in the coming months and years, you might want to get your cap table strategy in place now. Depend on a team of trusted lawyers and accountants to help manage and audit your cap table, and maybe don’t take this as an opportunity to dust off your own Excel skills. 

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2. Use an equity management platform

There’s a lot of power in using cap table software that’s built for this kind of thing. A platform like Pulley not only makes it easy to read and understand your cap table, but it can help you avoid costly tax and legal mistakes with compliance features such as automated error checking. Get a demo today.

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3. Update your cap table on a regular basis 

A cap table is no good to anyone if it’s out of date. Put the right people in charge of managing yours so you can rely on it to make up-to-the-minute business, hiring, and investment decisions.

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Managing your cap table as your company grows

Managing your cap table isn’t a set-it-and-forget-it type of deal. But you already knew that. We know it, too, which is why Pulley offers plans that scale up as your business grows. 
With Startup, Growth, and Custom plans designed to scale alongside your business, Pulley can quickly adapt to keep pace with your company’s shifting needs. Which leaves you more time to focus on taking your company to the next level. Now, how does that sound?